چکیده انگلیسی

We determine the optimal degree of price inflation volatility when nominal wages are sticky and the government uses state-contingent inflation to finance government spending. We address this question in a well-understood Ramsey model of fiscal and monetary policy, in which the benevolent planner has access to labor income taxes, nominally risk-free debt, and money creation. Our main result is that sticky wages alone make price stability optimal in the face of shocks to the government budget, to a degree quantitatively similar as sticky prices alone. Key for our results is an equilibrium restriction between nominal price inflation and nominal wage inflation that holds trivially in a Ramsey model featuring only sticky prices. Our results thus show that when nominal wages are sticky, setting real wages as close as possible to their efficient path is a more important goal of optimal monetary policy than is financing innovations in the government budget via state-contingent inflation. A second important result is that the nominal interest rate can be used to indirectly tax the rents of monopolistic labor suppliers. Taken together, our results uncover features of Ramsey fiscal and monetary policy in the presence of a type of labor market imperfection that is widely-believed to be important.

مقدمه انگلیسی

In a recent strand of the Ramsey literature on optimal fiscal and monetary policy, Schmitt-
Grohe and Uribe (2004b) and Siu (2004) have found that sticky product prices makes thevolatility of Ramsey inflation quite small. This result contrasts with the strikingly high inflation
volatility discovered by Chari et al. (1991) in an environment with flexible prices. Given
recent renewed attention to the importance of stickiness in nominal wages, a natural question is
to what degree does low volatility of Ramsey inflation arise in a model featuring sticky wages,
either instead of or in addition to sticky prices. In this paper, we address this question in a wellunderstood
Ramsey environment featuring only a few key distortions. Our main result is that
sticky wages alone dampen inflation volatility to a similar quantitative degree as sticky prices
alone in the face of shocks to the government budget. That is, consumer price stability characterizes
optimal policy if wages are sticky even if product prices are fully flexible.
Inflation volatility is high in the baseline model of Chari et al. (1991) because surprise movements
in the price level allow the government to synthesize real state-contingent debt payments
from nominally risk-free government bonds. Surprise inflation thus serves as a non-distortionary
instrument to finance innovations in the government budget, and so is preferred by the Ramsey
planner to changes in distorting proportional taxes. As a prescriptive matter for central bankers,
however, the optimality of highly volatile inflation seems peculiar. This prediction turns out to
depend crucially on the absence of allocative effects of surprise inflation in the Chari et al. (1991)
environment, due to the assumption of fully-flexible nominal prices and nominal wages. In contrast,
central bankers typically think of the economy as featuring nominal rigidities, which entail
costs of surprise movements in the price level.
Recent work by Christiano et al. (2005), Smets and Wouters (2005), Levin et al. (2005), and
others shows that sticky nominal wages may be more important than sticky nominal prices in explaining
macroeconomic dynamics. These results suggest more generally that labor market frictions
are of first-order concern in the formulation of policy advice and have sparked a resurgence
in studying the implications of sticky wages and other labor market imperfections for the design
of optimal policy. Because the Ramsey approach to designing macroeconomic policy is an attractive
one that has received increasing attention, it is of interest to investigate the impact of sticky
wages on Ramsey fiscal and monetary policy. This investigation is the purpose of this paper.
Our central finding is that even when it is only nominal wages that are sticky, the Ramsey
planner does not engineer volatile nominal prices in order to finance innovations to the government
budget. Thus, sticky nominal wages, similar to sticky nominal prices, impose an efficiency
cost an order of magnitude larger than the insurance benefit for the government of surprise inflation.
The basic reason for this result is that when nominal wages are sticky, setting real wages as
close as possible to their efficient path is a much more important goal of policy than financing
innovations to the government budget via state-contingent inflation.
Key for our result is a law of motion for real wages, which amounts to a restriction relating
real wage growth, nominal wage inflation, and nominal price inflation. The condition itself is an
identity, but is one that is a non-trivial part of the definition of equilibrium in a model featuring
sticky nominal wages. Thus, this law of motion must be imposed as a constraint on the Ramsey
problem. The main idea behind this restriction is that wage-setting behavior on the part of sellers
of labor constrains the path of nominal wages in such a way as to make the law of motion nontrivial.
This restriction drives price inflation dynamics to try to mimic the efficient path of real
wages when nominal wages are sticky. Quantitatively, this motive dominates the motive to use
inflation to finance shocks to the government budget. In contrast, with flexible nominal wages,
as in Chari et al. (1991), Schmitt-Grohe and Uribe (2004b), and Siu (2004), the nominal wage
adjusts residually to ensure consistency between the time paths of nominal prices and real wages.
We develop further economic intuition for this condition when we discuss the equilibrium of our
model.Low inflation volatility in response to shocks is a statement about the dynamic properties of
optimal policy in our model. Separately, our steady-state results also uncover a novel motive
for the use of policy due to monopolistic labor markets. Labor market power represents a fixed
factor of production. As such, the Ramsey planner would like to tax it heavily because doing so
raises revenue in a non-distortionary way. Absent an instrument that directly taxes this monopoly
power without distorting other margins, it can be indirectly taxed through a positive nominal
interest rate. Interestingly, we find this use of the nominal interest rate is optimal only if the
Friedman Rule of a zero net nominal interest rate has already been abandoned due to positive
producer profits — labor market power by itself does not induce a departure from the Friedman
Rule. A broader note this result sounds is that in ever-richer Ramsey models, there are likely to
be untapped rents the Ramsey planner would like to access through indirect instruments. This
cautionary note adds to Fernández-Villaverde’s (2005) remarks about interpreting policy advice
from ever-larger models and is related to Kocherlakota’s (2005) recommendation to consider a
complete set of policy instruments when studying optimal policy.
Our results complement recent work by Schmitt-Grohe and Uribe (2005), who study Ramsey
policy in the Christiano et al. (2005) model of the business cycle. The Christiano et al. (2005)
model features a host of frictions, including sticky nominal wages, sticky nominal prices, and
various real rigidities. In this model, Schmitt-Grohe and Uribe (2005) find that sticky wages in
concert with flexible prices do not reduce price inflation volatility relative to the fully-flexible
benchmark when their model economy is driven by both government spending and productivity
shocks. This result contrasts with our finding that inflation volatility falls by an order of magnitude
in the face of both government spending and productivity shocks. Because our calibration
of the exogenous shocks is quite close to their calibration, it seems the other frictions present in
their model may be masking the direct effect of sticky wages on inflation volatility. Our study
instead zooms in on the consequences of sticky wages for optimal policy. Our work also builds
on Erceg et al. (2000), who, in a model that abstracts from fiscal considerations, study optimal
monetary policy in an economy with sticky prices and sticky wages. In a model driven by productivity
shocks, they find that nominal prices are volatile when prices are flexible and wages are
sticky. We show that with a government financing concern present, this effect is dampened in a
quantitatively important way.
The rest of the paper is organized as follows. Section 2 outlines the structure of the economy
we study, which is a cash-good/credit-good environment featuring monopolistic suppliers of labor
and goods and stickiness in both nominal wages and nominal prices. Section 3 presents the
Ramsey problem, including an intuitive discussion of the key equilibrium restriction between
price inflation and wage inflation. Section 4 presents our quantitative results, both in steady-state
and dynamically. Section 5 examines how the effect of sticky nominal wages on optimal policy
is altered when nominal wages are indexed to nominal prices, a phenomenon for which there is
a good deal of empirical support. Section 6 considers our results from a different perspective,
that of the dynamics of real government debt, which from the work of Aiyagari et al. (2002),
Schmitt-Grohe and Uribe (2004b), and Siu (2004) is known to be dramatically altered when the
government either cannot or is restricted in its ability to make its debt payments state-contingent.
Section 7 concludes.

نتیجه گیری انگلیسی

In this paper we studied the effects of sticky nominal wages on the incentive to use surprise
nominal debt deflation to finance shocks to the government budget in a well-understood Ramsey
model of fiscal and monetary policy. Our central finding is that, due to a condition relating real
wage growth, nominal wage inflation, and nominal price inflation that is non-trivial in the presence
of sticky wages, price stability characterizes optimal policy in the face of fiscal shocks even
if nominal prices are flexible. The resource cost of nominal wage adjustment essentially forces
nominal price inflation to adjust in order to bring about the efficient path of real wages rather
than in order to finance shocks to the government budget. Loosely speaking, with sticky nominal
wages, getting the path of real wages right is more important than financing innovations in the
government budget via state-contingent inflation.
We also uncover the ability of the nominal interest rate to indirectly tax monopolistic labor
suppliers’ rents. This result hinges on the absence of an instrument that directly taxes labor
market rents. We cannot think of a real-world instrument that accomplishes this. If this missingtax
problem describes well the real world, then using the nominal interest rate for this purpose
may well be sound policy advice. Rather than drawing such a conclusion, we only wish to remind
that in a Ramsey framework, the set of instruments assumed available is very important for the
policy implications. This point is well-understood in the Ramsey literature, but the necessary
instruments to include in the complete set may not even be obvious a priori. We would add this
to the list of “caveats” Fernández-Villaverde (2005) suggests keeping in mind when thinking
about the policy implications of Ramsey models. Interestingly, this channel of taxing labor rents
is available in our model only if monopoly power exists in product markets as well—that is,
positive producer profits give the Ramsey planner the leverage to tax labor rents. It would be
interesting to explore further why this is Ramsey-optimal.
Our study makes a contribution to the broader investigation of the consequences of labor market
failures for optimal macroeconomic policy. Sticky nominal wages are but one labor market
friction that one may be interested in considering. Also of interest may be studying the effects of
efficiency wages or of labor market search and matching frictions on optimal policy, as in Domeij
(2005) and Arseneau and Chugh (2006). More generally, the consequences of labor market frictions
for the conduct of policy is an issue that has been of interest for a long time but seems to
not have received proportionate attention in the DSGE optimal policy literature. Recent developments
in DSGE model-building incorporating labor market frictions seem to warrant renewed
attention to this issue.